Tax Tips for Investment Property in Melbourne
You may not realise it but your investment property in Melbourne could be providing you with more tax deductions than you realise. More and more property owners are learning the different ways to reduce property related taxes legally. Are you already one of them? How long have you owned your property? There are dollars to be saved and it’s not too late. This article might give you a helpful tip or two.
How to Lower Tax for Your Investment Property in Melbourne
There are a number of legitimate ways to gain property tax reductions without toeing any legal lines. Here are some ways you can reduce your tax:
Depreciation of property
Take a closer look at your property. As the structure ages, it depreciates in value and tax can be readjusted accordingly. If you’re already paying lower taxes for depreciation, check the items included in the computation for the property value. There might be assets that can be included that haven’t been previously. You may be surprised because you can actually count items such as freestanding bathroom accessories, rugs, ceiling fans and a lot more. A complete list is available at the Australian Tax Office (ATO). Some people make the mistake of listing the cost of repairs instead of the value of depreciation and these are two separate items. Keep in mind that renovations are considered as cost of capital and aren’t considered as tax-deductible whereas repairs are tax deductible.
Negative gearing or net loss
We expect our investment property in Melbourne to be earning capital growth but that’s not always the case. There are situations where it takes time before you earn a profit and only clever property selection will ensure that you have bought an investment grade property that will go in value. To aid you through this time until you start to earn a profit or decide to resell, you can declaring the negative cash flow against income tax to get a tax reduction. Always consider before buying if you strategy should be capital growth or cash flow as this can have a substantial impact on your weekly outgoings.
Previous main residences can be exempted from capital-gains tax (CGT)
It’s important to identify which dwelling is your main residence because of the exemption from CGT. Even if you no longer occupy the property, you can still claim an exemption from CGT for up to six years in some cases, however it’s important to check this with your accountant to determine if it applies to you. This applies only under the condition that it can still be treated as your main residence. Clarify with the ATO or your accountant whether your investment property in Melbourne is your main residence or not. Only one property is considered as a main residence at a time.
Other expenses considered as tax-deductible.
Yes, you actually get tax deductions for spending on items related to your assets. Real estate is expensive, so this is welcome news if you own an investment property in Melbourne. These expenses cover the maintenance of the property such as garden and travelling for property inspections. Be mindful though, that it can take many years before you can receive your capital works deduction. Renovations don’t provide an immediate tax deduction, as they are aligned with the value of the depreciation instead. Capital works deduction rates differ according to when the construction began and the type of construction or extent of renovation.
Hold on to your receipts and proof of purchases.
Documents that verify any incurred costs for the improvement of the property should be mindfully kept. Any expenses for related services or items purchased that are tax-deductible will not be honoured without receipts. Auditing activity is increasing and your investment property in Melbourne may be inspected by the ATO. To avoid any delays and inspections, ascertain that all necessary papers are available.
Structure your loan well.
A common mistake among investors is to have a single loan for both their residence and their real estate investment. To avoid any problems during an audit, have separate mortgages for each property. If you prefer one mortgage for both or more properties, ensure that your loan is properly structured. This will smooth the auditing process as it lessens the possibility of issues and resulting delays.
Buying property in Melbourne is financially straining and any property investment should be a decision made with prudence. New investors often adjust their lifestyle to better shoulder the additional expenses, however most regard it as fulfilling in the long term and worth the lifestyle changes.
Capitalising on the various tax deductions available will help ensure any financial strain is reduced. Plus it’s always important to remember that as the capital grows in value, you will reap the rewards later in life.
To find out more about buying investment grade property, contact Melbourne’s leading team of buyer’s agents. We’ll help you find a property to suit your budget, lifestyle and financial goals.
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